Refinancing, profitability, and capital structure

Andras Danis, Daniel A. Rettl and Toni Whited

Journal of Financial Economics, 2014, vol. 114, issue 3, 424-443

Abstract: We revisit the well-established puzzle that leverage is negatively correlated with measures of profitability. In contrast, we find that at times when firms are at or close to their optimal level of leverage, the cross-sectional correlation between profitability and leverage is positive. At other times, it is negative. These results are consistent with dynamic trade-off models in which infrequent capital structure rebalancing is optimal. The time series of market leverage and profitability in the quarters prior to rebalancing events match the patterns predicted by these models. Our results are not driven by investment layouts, market timing, payout, or mechanical mean reversion of leverage.

Keywords: Capital structure; Profitability; Refinancing points (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (36)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:114:y:2014:i:3:p:424-443

DOI: 10.1016/j.jfineco.2014.07.010

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